Rising Claims Costs Limit U.S. P/C Profitability in 2023

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While the profitability outlook for the U.S. P/C industry this year is mixed, Swiss Re predicts a stronger year in 2024, as premium increases and interest rates improve industry results.

According to the U.S. Property & Casualty Outlook report, the P/C industry hasn’t “reached the inflection point between premium growth rates and claims costs.”

Strong rate increases in personal lines, an ongoing hard market in commercial property and high reinvestment yields were offset by the costliest second quarter for natural catastrophes since 2011, persistent inflation and slowing favorable reserve development, the Swiss Re report noted.

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Despite higher investment earnings, through the first half of 2023 underwriting losses reached $22 billion, resulting in net income of just $2 billion.

Swiss Re’s initial estimate of an 8 percent return on investment in 2023 has been lowered to 6.5 percent, with an estimated ROE of 9.5 percent in 2024.

The premium growth estimate has increased from 7.5 percent to 9 percent, with a 5.5 percent expectation in 2024, driven by growth in personal auto and commercial property.

This year, the U.S. P/C market segment saw a considerable improvement on 2022, when the ROE was just 2.4 percent.

Higher investment returns this year, boosted insurers’ profitability, while elevated catastrophe activity is weighing on underwriting results.

Severe convective storm claims during the first half of 2023, estimated at $34 billion, drove an estimated $16 billion in extra claims costs.

A 14 percent jump in total loss costs outweighed 6 percent net earned premium growth, the report found, resulting in an underwriting loss of $22 billion. The loss was partially offset by net investment income increasing 28 percent year-on-year.

Stronger underwriting results in the second half of 2023 are expected given there has been no major hurricane thus far and with the anticipation of receding inflationary impact on loss costs, while gains from higher interest rates accrue.

In commercial lines, the report indicates strong property growth is offset by weak or negative growth in liability lines.

The report outlines a revised 2023 combined ratio forecast to 102 percent.

The industry net combined ratio jumped to 107.3 in the second quarter of 2023, with natural catastrophes adding 11.8 points, well above the 10-year average of 6.3, the report outlined.

Inflation continues to raise claims severities across property lines.

Year-to-date, personal lines loss ratio was nearly 23 points higher than commercial lines, as catastrophes affected homeowners more than commercial policies.

Swiss Re’s outlook indicates an expectation that loss severities will ease as average U.S. headline CPI inflation decelerates to the forecasted 4 percent in 2023 and 2.5 percent in 2024, “setting the stage for improved underwriting results as rate gains eventually outpace claims costs.”

Property loss costs continue to surge.

In the first half of 2023, homeowners and commercial property claims costs increased 36 percent and 30 percent, respectively, year over year, the result of inflation and natural catastrophe losses.

Despite this, both personal auto and homeowners premiums grew by double digits in the first half of 2023, driving strong industry growth of 8.6 percent.

The homeowners loss ratio is up by 15 points from the same period in 2022, to over 82 — the highest first half in over a decade, Swiss Re said.

Due to insurer pullbacks this year, there is an estimated 20 percent less availability for insurance options than a year ago.

With respect to personal auto, the line’s 112 combined ratio in 2022 was the highest since the 1970s. With the loss ratio still elevated in 2023, there is a way to go before profitability returns.

In the second quarter 2023, direct premium growth kept pace with loss costs for the first time in more than two years, Swiss Re noted.

“Based on CPI data, statutory rate filings and earnings call commentary, we expect earned premiums growth rates to continue to accelerate while loss costs decelerate,” the outlook stated. The auto union strike could be a stumbling block disrupting the supply chain and increasing used car prices.

Commercial lines saw rate increases of 8.9 percent year-over-year in the second quarter of 2023, slightly faster than the 8.3 percent gain in in the first quarter of the year.

Property rate gains remain strong, rising 20 percent after a 21 percent increase in the first quarter of 2023.

Commercial liability lines profitability is significantly lower, holding steady in the low to high single-digits except for D&O and cyber, where price gains are slowing. Swiss Re expects rate increases through 2023 due to inflation and catastrophes putting pressure on claims and operating costs.

Fire & allied lines grew 17 percent but were offset by general liability (sum of other liability, medical professional liability and product liability) premiums down 1 percent.

Average investment yield is estimated at 3.5 percent in 2023 and 3.7 percent in 2024, according to Swiss Re.

Reinvestment yields remain above rates on maturing securities, and the outlook forecasts the 2023 reinvestment yield at about 5.2 percent.

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